COLOMBO (News 1st) – Fitch Ratings has downgraded Sri Lanka's Long-Term Local-Currency Issuer Default Rating (IDR) to 'CC', from 'CCC', and has affirmed the Long-Term Foreign-Currency IDR at 'RD' (Restricted Default). Fitch typically does not assign Outlooks to ratings of 'CCC+' or below.Fitch has also removed the Long-Term Local-Currency IDR from Under Criteria Observation, on which it was placed on 14 July 2022, following the publication of the updated Sovereign Rating Criteria.A full list of rating actions is at the end of this rating action commentary.KEY RATING DRIVERS:Challenging Domestic Financing Outlook: Sri Lanka continues to service its local-currency debt, but the downgrade of the Long-Term Local-Currency IDR reflects our view that a local-currency debt default is probable, in view of an untenably high domestic interest payment/revenue ratio, high interest costs, tight domestic financing conditions and rising local-currency debt/GDP in the context of high domestic fiscal financing requirements, which authorities forecast at about 8% of GDP in 2022.According to authorities, domestic interest payments in 8M22 were LKR718.8 billion, taking the domestic interest/revenue ratio to an estimated 56% in 8M22; the highest among sovereigns rated 'CCC+' and below.
Reliance on central bank financing has increased, as domestic options are limited. Domestic debt rose to about 53% of government debt by end-July 2022, according to official provisional data.
Treasury bill issuance has been increasing. We expect a local debt restructuring would aim to maintain financial system stability, for example, by extending maturities or lowering coupon payments, rather than a reduction in face value.
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